Everything Aflac: Duck Analysis From Morningstar

Aflac Looks Cheap, But Exposure To Europe Raises Concerns

Outlook on July 24

Commenting on the company’s second quarter results, Chairman and Chief Executive Officer Daniel P. Amos stated:

“We are pleased with our overall results in the second quarter of 2012. Aflac Japan had another strong quarter, continuing impressive sales momentum, especially through the bank channel. Aflac Japan’s second quarter production set an all-time new annualized premium sales record for the fourth quarter in a row. I would also note that persistency remained strong. Facing difficult sales comparisons in the third and fourth quarter, we anticipate new annualized premium sales in the second half of the year will be flat to up 5%. However, combining this second half sales expectation with the tremendous results we produced in the first half of the year, we believe it is reasonable to expect an annual sales increase for 2012 of 22% to 25%."

“Aflac U.S. also generated positive second quarter results. While sales in the second quarter were slightly below our annual sales target, year-to-date results were in line with our annual sales target of a 3% to 8% increase. With the majority of our enrollments occurring in the fourth quarter, we expect sales results to improve. We’re pleased that our distribution channels continue to benefit from our ability to offer both group and individual products. We remain focused on expanding our reach to employees at companies, large and small, and we have positioned our business for growth in the evolving health care environment. Additionally, we believe initiatives to improve servicing levels with current policyholders and payroll accounts have been successful. As such, these efforts have contributed to improved persistency with these customers."

“We continued to make progress with the transformation of our Global Investment Division. As we’ve said many times, we expected to see volatility in Europe, and that’s exactly what we saw in the second quarter. Although our total realized losses in the second quarter were higher than the first quarter this year, they were significantly improved compared with the second quarter of 2011. While we still view Europe as an area of potential investment risk, I believe our portfolio is now better-positioned to accommodate market volatility. In the third quarter, we will begin investing in dollar-denominated, public fixed-income securities and currency hedges to yen. We believe this strategy will provide greater liquidity and overall flexibility for our portfolio and increase opportunities to diversify the investment of our significant cash flows beyond JGBs, with the objective of producing higher returns."

“We had another strong quarter with respect to our capital position. The strength of our capital ratios demonstrates our commitment to maintaining financial strength on behalf of our policyholders and bondholders, as well as our shareholders. As we have communicated over the past several years, a strong risk-based capital ratio remains a priority for us. Although we have not yet finalized our statutory financial
statements, we estimate our RBC ratio was between 560% and 600% at the end of June, which is up from our year-end ratio of 493%. The significant increase in the ratio from year end is due to the first quarter 2012 implementation of a new statutory accounting standard for income taxes. As you know, our capital adequacy in Japan is principally measured by our solvency margin ratio. We expect that Aflac Japan’s solvency margin ratio at the end of the second quarter remained at the high end of our 500% to 600% target."

“Overall, I look forward to another good year for Aflac, and I’m excited for the growth opportunities that lie ahead. With half of the year complete, we continue to believe we are well-positioned for another year of solid financial performance. I believe we’ve done a very good job in managing our operations, including expense control. As we’ve conveyed, focusing on investments is our top priority, and we are investing in initiatives to further our vision of building a world-class investment function. This initiative requires additional layers of complexity and resources with expenditures on IT, personnel, and processes. This is possible, in part, due to the first quarter receipt of a deferred coupon that allows us to accelerate the funding of this critical global initiative, while still achieving our operating earnings-per-share objective this year."

“I want to reaffirm that in 2012, we expect operating earnings per diluted share to increase in the range of 3% to 6%, excluding the impact of foreign currency. If the yen averages 80 for the full year it’s likely operating earnings per diluted share will be $6.45 to $6.52 for the year, which is toward the lower end of the range, due to the continued low level of investment yields. Using that same exchange rate assumption, we would expect third quarter operating earnings to be $1.64 to $1.69 per diluted share. We believe that is reasonable and achievable. As I conveyed at our analyst meeting in May, for 2013, our target is to achieve growth in operating earnings per diluted share of 4% to 7%, excluding currency. This earnings objective assumes no significant impact on investment income from losses and no further meaningful decline in interest rates."

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Thursday, June 7, 2012

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